I enjoyed your article on the differences between wills and living trusts. Could you also explain the differences between revocable and irrevocable trusts?
First, the basics. A trust is a legal entity that can own assets. When you create a trust, you fund it, name its beneficiaries, choose the trustee, and set legally binding rules for how the trust assets can be used. You can transfer assets into the trust during your lifetime or after your death via your will.
A revocable trust, also known as a living trust, can be changed — or revoked entirely — at any time. Like your will, it only becomes irrevocable at your death. During your lifetime, you retain control of a revocable trust’s assets. As a result, although this type of trust can be an alternative to a will, it can’t shelter your assets from your creditors, change your tax bill, or help you qualify for Medicaid.
By contrast, an irrevocable trust is a done deal. You can’t change its terms or take back its assets. (That’s why it’s essential to choose a trustee who understands your intentions, and to create trust rules that give him or her enough flexibility to respond to changing circumstances.)
An irrevocable trust can be a good way to leave money to a disabled heir who might be disqualified for government benefits if he received it as an outright bequest, for example, because you can specify that the trust assets only be used to pay for goods and services that aren’t covered by government programs. Transferring assets to an irrevocable trust can also be a way to make yourself eligible for Medicaid at a future date, by reducing the amount of money that will be available to pay for your long-term care.
THE BOTTOM LINE An irrevocable trust can’t be changed.
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